College loans like financial roller coaster

July 1 marked the day when interest rates for subsidized Stafford loans for college students doubled.

Last week, the U.S. Senate passed a bill, retroactive to July 1, that would tie those rates to the 10-year treasury rate at the time a loan is approved. This year that would be 3.9 percent for undergraduates and 5.4 percent for graduate students.

Unsubsidized loan interest rates will also drop from 6.8 percent to 5.4 percent.

In a White House press release dated July 23, the Obama Administration called on Congress to pass a compromise to keep student loan interest rates low this year by linking rates to the economy, something that could be said is similar to a roller coaster.

Interest

“Last year, it (interest rate reduction) expired, and they passed a one-year extension on that expiration,” said Davis. “So, they were looking to do that again, and didn’t.”

The extension that kept interest rates low expired July 1. Then, Congress formed a new bill that will lower interest rates on subsidized loans for 2013, but that may not stay low in the future.

“The main difference that we tell our students between the subsidized and the unsubsidized is the subsidized would be the better of the two,” said Davis, “because the interest doesn’t start accruing until you’re below half-time student. What that means at Southwestern is you’re under six credit hours, or you’ve graduated or you’ve stopped attending.”

The interest does not start accruing until six months after students are below the half-time student mark. Eligibility for subsidized loans is based on different variables in a student’s life: income, family size and how many family members are in college, to name a few.

Instead of Congress voting on the student loan interest rates in future years, it will connect rates to market conditions. Rates will rise and fall based on the economy, like the hills and dips of a financial roller coaster.

According to a Time article, “congressional researchers project that the rate on new loans for undergraduates would be 4.62 percent for loans taken out next year and 7.25 percent for loans taken out in 2018. The bill caps the rate at 8.25 percent.”

College

So, what does that mean for local college students?

“We’re hoping, that because our costs are lower than some other colleges, hopefully the impact will be minimal to our students,” Davis said. “Obviously, it’s going to create a little larger loan payment, they’re going to end up paying a little more on their loans before they are fully paid off.”

Davis said there are other variables to look at when determining how the interest rates will affect college students and their college choices.

“It could deter students from enrolling in college,” Davis said. “But it could also help us because a student’s going to take less loans out with us here at Southwestern, than if they went off to a university.”

It is estimated a college student in Iowa will save more than $1,500 over the life of their loans. More than 250,000 Iowans will be undergraduates during the 2013-14 school year.

“It’s hard to predict exactly what’s going to happen,” Davis said. “You know, it might stop somebody from coming, but it also might make someone look at us a little bit closer.”